The most recent proxy for Upstart Holdings (NASDAQ:UPST) said its largest owner of UPST stock was Third Point Ventures, an affiliate of Daniel Loeb’s Third Point LLC. Third Point focuses on event-driven, value investments.
As of March 15, Third Point held 13.38 million shares, good for 18.1% of the company. However, after UPST hit an all-time high of $401.49 in October 2021, its shares have lost almost 75% of their value.
By Dec. 3, Third Point had sold about 40% of its shares, with most stock sales in the fourth quarter.
It’s possible as we sit through a significant market correction – from Jan. 4 through Jan. 24, the S&P 500 had lost 12.4% of its value from its high of 4819 – that Third Point will carry out another barrage of selling.
Should regular investors unload Upstart stock? No, I don’t think so. Here’s why.
UPST Stock Is Cheap
When I say “cheap,” I’m suggesting it’s inexpensive relative to where it was trading in October. I’m not suggesting it’s cheap relative to much more established companies. Upstart only got its start in 2012. It only went public in December 2020 at $20 per share. That’s less than 14 months ago.
Over the past four fiscal years, Upstart grew its revenues by 307% to $233.4 million in 2020 from $57.3 million in 2017. As a result, its adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) have increased by 770% to $31.5 million in 2020 from -$4.7 million in 2017.
In addition, the company uses a key productivity indicator (KPI) called contribution profit, which subtracts its borrower acquisition costs – what it takes to acquire a borrower – and its borrower verification and servicing costs from revenue from fees, net. The contribution profit margin is obtained by dividing its contribution profit by revenue from fees, net. You can find all of this information on Page 87 of its 2020 10-K.
Upstart had a contribution profit of $105.1 million in 2020 and a 46% margin. In 2017, it was $9.27 million, good for an 18% margin. Over three fiscal years, its margin increased by 2.6x.
Its business has more than delivered by these metrics, but its stock valuation has never been cheaper.
Based on the underwriter’s over-allotment exercise, Upstart’s market capitalization at its IPO offering was $1.45 billion, or 6.2x sales. In November, Upstart estimated its revenue in the fourth quarter would be $260 million at the midpoint of its guidance.
As a result, its full-year revenue is estimated to be $803.7 million [$543.7 million through the first nine months of 2021 plus $260 million in Q4 2021] or 10.9x sales. In the 14 months since its IPO, that’s its lowest price-sales ratio.
Upstart Makes Good Money
InvestorPlace contributor Larry Ramer recently suggested that UPST is an excellent fintech buy given its pullback. My colleague pointed out that Piper Sandler analyst Arvind Ramnani had an overweight rating on Upstart with a 12-month target price of $223.
The average analyst rating of the 10 that currently cover UPST stock is overweight, with a median target price of $239. If you consider that the lowest target price is $95, and it’s trading at $117 at this writing, the downside doesn’t seem to be all that great.
Upstart will release its Q4 2021 results after the markets close on Feb. 15. As I stated earlier, it expects $260 million in revenue at the midpoint guidance with a 47% contribution margin and adjusted EBITDA of $52 million at the midpoint, 20% of sales.
In 2022, analysts expect earnings per share (EPS) to grow by almost 20% to $2.33, up from their estimate of $1.95 in 2021. Over the past four quarters, its actual EPS has beaten the analyst estimate on all four occasions, averaging a 19% beat to the upside. It’s likely to continue beating the estimates.
Here’s what I had to say about Upstart in early January:
How many fintechs do you know that are growing the top line by more than 200% and profitable? Not many. For whatever reason, investors have chosen to group Upstart in with the Zillow’s of the world, and that’s not accurate. Ultimately, I might turn out to be wrong about Upstart, but I don’t think that’s going to happen.
I was referring to the fact in November, I said its share price could move from $314 to $1,000 in 2022. But, of course, that was before the market correction we continue to face.
While $1,000 is now likely off the table in 2022, I would not be surprised to see it close to its all-time high of $401.49.
As for Third Point, Daniel Loeb is estimated to have paid an average price of $40.75 for his firm’s significant stake in Upstart. Selling in early December at prices between $191 and $168, Loeb wanted to ensure that Third Point got some or all of its initial investment out before it fell any further.
The Bottom Line
I will be watching closely to see if Third Point sells any more UPST stock.
In the meantime, if you’ve yet to sell, I wouldn’t. Instead, I would consider adding more should you have the cash to do so. At $115, I would characterize Upstart as growth at a reasonable price.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.
